Heterogeneity and Biases in Inflation Expectations of Japanese Households
This study examines the formation of the inflation expectations of Japanese households using a micro-level dataset of forecast errors of expected inflation rates. The Japanese have recently come to be interested in policies that intend to positively influence the inflation expectations of households and firms. The effectiveness of these policies depends on the mechanism of expectation formation. Thus, whether expectations are formed adaptively or rationally, or whether expectations are homogeneous or heterogeneous, are important factors influencing policy effectiveness. In this study, we carefully examine the formation of inflation expectations of Japanese households by using a micro-level dataset of the “Consumer Confidence Survey” of the Japanese government. We observe that inflation expectations are stably biased upwards and are distributed in a dispersed way. We find that the “asymmetric loss function model,” in which households incur asymmetric loss from either over estimation or underestimation of the future inflation rate, can explain the observed bias to a certain extent. Further, the relationships between expectations and age show a stable asymmetric inverted-U shape notwithstanding the survey period. The a symmetric loss function can also explain this shape, indicating that mid-aged consumers tend to show strong asymmetries in error aversion.
|Date of creation:||Jan 2014|
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